Warren Buffet calls it “cigar butt” investing; or buying stocks for less than 50 cents in the dollar. These type of ‘unloved’ companies are extremely rare, since they often trade at around net current tangible assets (NCTA). So what about Molins? Well, we think this niche engineer is another ’special situation’.
You see, despite being profitable, cash generative and paying a 5.5% dividend yield, the shares at 50p, languish at a 53% discount to net tangible assets (NTA, of 107p), and are only 12% above Dec’15 NCTA of 44.5p/share (adjusted for net debt). Sure the latter excludes the £6.6m US pension deficit (net of tax), albeit neither does it factor in the substantial upside (perhaps worth >50p/share on its own) in the event planning permission is granted on circa 10 acres of spare land located in Buckinghamshire.
What’s more, today the group confirmed that current trading is in line with expectations, with Q1’16 results being at a similar level to last year. Although market conditions undoubtedly remain tough, we are hopeful that demand for Molins’ high speed packaging, tobacco and testing machines will recover as the global economy picks up steam. A view consistent with full year earnings being significantly 2nd half weighted, on top of the normal seasonal effects.
In terms of valuation, the stock trades on forward EV/EBIT and PE multiples of 4.6x and 4.7x respectively, representing a significant discount to other precision engineers (see below) and our sum-of-the-parts price target of 120p/share.